Lula government asks the STF to remove the ceiling for court orders

Brasília (DF) – The Federal Attorney General’s Office (AGU) asked the Federal Supreme Court (STF) to overturn the limit for court orders established under the Jair Bolsonaro (PL) government and proposed the payment of part of the court sentences as a financial expense, without come up against tax rules.

The Luiz Inácio Lula da Silva (PT) government also requests authorization to pay off the stock held up until now through extraordinary credit, which is also outside the reach of budget limits. The liability is estimated at around R$95 billion, and its regularization should increase the public debt.

The position of the legal body seeks to pave the way for Minister Fernando Haddad’s (Finance) strategy of “depealing” court orders before 2027, when the end of the ceiling for payment of these debts could detonate a fiscal bomb exceeding R$250 billion, in numbers updated by the government.

The government’s plan to classify part of the spending on court orders as financial expenses was anticipated by Folha in August.

The change in accounting treatment required by the AGU would apply not only to inventory, but also to court orders issued in the future. The objective is to reduce pressure on the new fiscal framework, which only limits the growth of primary expenses.

The intention to regularize court orders has been well received in the financial market, but the chosen method (reclassification of expenses) is seen by critics as a maneuver to avoid worsening fiscal statistics, in a kind of reissue of the creative accounting adopted in previous PT administrations. —label that members of the current government reject.

The original idea was to present a proposed amendment to the Constitution (PEC) to address the issue, but the government initially opted for a judicial approach, considered less complex.

A PEC needs the support of 308 deputies and 49 senators to be approved. In the Supreme Court, the government will work to convince 11 ministers.

The petition was presented this Monday (25) as part of a direct action of unconstitutionality that questions the validity of the constitutional amendments approved at the end of 2021. The rapporteur of the action is Minister Luiz Fux. The requests will still need to be analyzed by the court.

The content of the demonstration represents a change in the position of the AGU, which under Bolsonaro defended the constitutionality of the court order limit. The measure, approved with the aim of making room in the 2022 Budget to boost spending in an election year, was dubbed by critics as “PEC do Default”.

According to the AGU, the change in stance comes after a joint technical note from the National Treasury and the Attorney General’s Office of the National Treasury (PGFN) presented a “thorough technical analysis on the topic”.

The technicians’ central argument is that the new precatório payment regime imposes difficulties on long-term fiscal sustainability, produces negative impacts on fiscal statistics, in addition to bringing indirect harmful economic effects, with consequences for the country’s reputation.

“The continuation of the current precatório payment system has the potential to generate an unpayable stock, which would result in the need for a new moratorium, intensifying and projecting violations of fundamental rights over a longer period of time”,

says the AGU in the document.

The government asks the STF to declare the unconstitutionality of the ceiling on court orders and the articles that authorize the so-called meeting of accounts, a compensation instrument that allows the use of pending court orders to settle commitments with the Union, such as tax debts and auction grants.

The AGU also proposes measures to “enable a definitive solution to the problem” of the stock of court orders, which could reach R$95 billion, considering the amounts held up until the end of 2023 and what would no longer be paid in 2024 under the current system.

One of the proposals is to separate the value of debts into principal (the obligation that gave rise to the legal dispute) and interest and monetary correction charges. The first group would be paid as a primary expense, maintaining the classification of the liabilities targeted by the dispute (salaries, social security benefits or government contracts). The charges would be paid as financial expenses.

Today, charges are also considered primary expenses, which technicians argue is inappropriate. For the government, they are similar to interest on public debt.

“[O]The financial charges associated with court sentences reflect the monetary effect of the passage of time on an existing right against the State, added to possible penalties that aim to compensate the creditor for the delay in recognizing this right and paying the respective debt. This component of court sentences therefore has a clear financial nature”,

say the technicians, in an excerpt reproduced by AGU.

This is a key point of the plan, as financial expenses are outside the reach of the spending limit of the new fiscal framework and the primary result target, although their existence continues to boost the country’s debt.

In the joint note attached to the process, Treasury and PGFN state that simply removing the stock of court orders from the scope of current tax rules would not be enough to resolve the impasse.

If judicial debts continue to grow at a significant pace in the coming years, they may take up space for other policies within the new framework, which has its expansion limited to a percentage between 0.6% and 2.5% above inflation per year. Changing treatment, in turn, helps alleviate this pressure.

“In view of the new Sustainable Fiscal Regime —which has a long-term perspective, with penalties for the growth of other budget expenses in the following years if the primary result target is not achieved—, a definitive solution is necessary so that only expenditure effectively of a primary nature impact this concept of determining the effort of responsible fiscal management”,

says the text of the technical note reproduced by AGU.

Under this logic, the government requests authorization to redistribute the stock of court orders between primary and financial expenses, “through approximate parameterization”, within a period of up to 60 days from the decision. The piece, however, does not detail how much of the R$95 billion would be in each category.

The document asks the STF to determine to the competent bodies the segregation of these amounts in future issuances of court orders, to enable reclassification in the coming years as well.

The AGU further requests that the court “recognize the urgency and unpredictability of immediate payment of issued and unpaid court orders already reported to the Union”, allowing the Executive to open extraordinary credit to settle debts already accumulated within 60 days. The only exception would be debts equivalent to the amount reserved in the 2024 budget proposal, which would be paid off as already scheduled.

According to technicians, the “immediate payment of the stock of court orders issued and not paid through the opening of extraordinary credit creates conditions for regularizing payments without compromising ongoing budget planning”.

The petition also asks that the STF “removes any legal and constitutional limits or applicable fiscal, financial or budgetary constraints from compliance with the possible decision of this Supreme Court”.

In another section, the government is trying to obtain a decision from the STF that will also bind the Central Bank, the body responsible for official statistics on Brazilian public finances.

It is the BC who calculates the government’s primary result and indicates whether the year’s fiscal target was met or not. To do this, the institution is based on its own standards manual, inspired by criteria used internationally, and may differ from criteria adopted by the National Treasury.

As the BC classifies precatório as primary expenses, the regularization of liabilities in 2023 could excessively worsen this year’s result, which is already a deficit of R$141.4 billion. The target allows for a gap of up to R$216.4 billion. The BC’s interpretation could still require greater effort from the government to meet the targets established for the following years.

Therefore, the government asks the STF to authorize the bodies responsible for both budgetary and financial execution and the calculation of fiscal statistics to give court-ordered charges the same accounting treatment given to interest on public debt.

*With information from Folha de S.Paulo

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